Sunak Wins Over the Markets. Voters Are Another Story

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Two short letters have become infamous in UK political history for their frankness about the country’s dire finances. Reginald Maudling, the outgoing Tory chancellor in 1964, told his Labor successor and friend Jim Callaghan: “Sorry, old cock, to leave it as it is.” In 2010, Labour’s chief treasury secretary Liam Byrne also offered his Lib Dem successor David Lowes a bogus apology: “I’m afraid there’s no money.”

Their jokes were snarled by their opponents, but both had the ring of truth. Successive governments were undermined by the profligacy of their predecessors. Today’s opposition Labor Party should remember them as a warning.

With the Office for Budget Responsibility forecasting UK living standards to fall by 7% over the next two years (the steepest fall on record), the prospect points to an election defeat for the Conservatives in two years’ time. The National Bureau of Statistics estimates that wage growth is easily outpaced by price increases and that the recession will last a year. The burden of tax rises announced in Thursday’s Autumn Statement will be borne by middle income earners, many of whom are Tory voters.

Prime Minister Rishi Sunak, former Goldman Sachs Group Inc. banker, has won the markets’ respect for his fiscal conservatism, but is struggling with voters. He polls poorly when it comes to “communication” and “understanding the lives of ordinary people”. Perhaps we’ll see less of his Prada loafers and expensive office wear. The personal is forever political. Sunak’s vast private wealth and his wife’s former non-resident status (which gave her a tax exemption on her foreign income) are tempting targets for Labour.

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Sunak also lacks the X-factor appeal of former prime minister Boris Johnson to many ex-Labour voters who enjoyed his scathing of the political class. These switchers may return to their old faith in the next election. The Conservative Party is demoralized. Its favorite newspaper, The Daily Telegraph, asks what’s the point of voting for the Tories if they raise taxes and reform the public sector. The Institute of Economic Affairs, the UK’s leading free-market think tank, accuses the government of “managing decay”.

If the Tories lose, Sunak’s serious Chancellor of the Exchequer, Jeremy Hunt, will not fall into the trap of writing a tongue-in-cheek letter of resignation to his eventual successor, shadow chancellor Rachel Reeves, a former Bank of England economist. But the unspoken message will be the same: no money.

Labour’s recent 20-point lead in opinion polls has given a springboard to the party’s move, although an election victory cannot be taken for granted given the large number of seats Labor needs to win an outright majority. However, if they triumph, Reeves and her leader Keir Starmer will have to deal with a demoralizing Tory legacy. Hunt’s £55 billion fiscal cuts postpone many public spending cuts until the next general election at the end of 2024.

A centre-left party that has historically supported the provision of generous public services will find that the piggy bank is empty. How will Labor make a difference if they can’t fund the growth strategy? Its ambitious £28 billion Green Welfare plan, unveiled in September, looks vulnerable in the current economic climate. Will Labor also manage the recession?

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Long before any general election campaign, traps are being laid for Labour. Hunt can challenge Reeves to accept his plans or outline how she will find the money to change them. As Reeves herself observed in her sharp response to Hunt in the House of Commons, “the Tories want to party like it’s 2010.” That year, Chancellor George Osborne cut the budget and called on Labor to say how they would balance the books. It is no accident that Osborne has been invited back to Downing Street to give advice on how to snooker the opposition.

However, the last time Labor produced an alternative budget, before the 1992 election, the party was defeated despite the fatigue of 13 years of Tory rule. The Conservatives and their allies warned in the press of the coming “double tax debacle” by the opposition, and Labor could not respond.

Reeves and Starmer have taken a different route. For the past 15 years, Labor has trailed the Tories on economic competence. Recent market turmoil has finally given them a lead in the opinion polls, but this may only be temporary – the last Tory Prime Minister’s package of unfunded tax cuts led to her ouster.

Labour’s Tony Blair and his shadow chancellor Gordon Brown faced the same dilemma in the 1990s. The Tory government at the time was beset by divisions, scandals and recent economic failure. But voters still needed to be reassured that their money would be safe in Labour’s hands, even if most wanted to spend billions rebuilding dilapidated schools and hospitals.

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Reeves has chosen to emulate Blair and Brown by promising that a Labor government would not borrow to fund day-to-day spending. She even backed the Tories’ cut in the basic rate of income tax before it was scrapped a few weeks ago.

But there is a big difference between Labor then and now. In 1997, the Tories wished Blair and Brown stable finances in the midst of a long post-Cold War boom. Due to globalization, inflation was low and prices of manufactured goods fell. Today, globalization is reversed, war is on Europe’s doorstep, and rising interest rates on government debt have left a black hole in the Treasury’s accounts. The tax burden has risen to heights not seen since World War II.

We are much closer to Britain’s Maudling’s stuttering stop-go economy and Byrne’s miserable post-recession crisis. A glimmer of hope calls for an optimistic OBR forecast of stable growth in 2025. But Labor can’t count on that just yet. Most likely, there will be no “money”. Poverty will pave the way back to power for the opposition party.

More from Bloomberg’s opinion:

• The UK Budget’s deadly silence on housing: Theresa Raphael

• UK could use World Cup win – for economy: Andrea Felsted

• The UK already has a nasty wealth tax: Merryn Somerset Webb

This column does not necessarily reflect the views of the editorial board or of Bloomberg LP and its owners.

Martin Ivens is editor of the Times Literary Supplement. He was previously editor and chief political commentator of the Sunday Times of London.

More stories like this are available at bloomberg.com/opinion

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